Month: April 2005

A few years ago one of the bear stories on telecommunications equipment makers was the efforts of a Chinese company, Huawei Technologies, to enter that space with—no surprise—extremely cheap product.

Testosterone-rich Silicon Valley largely laughed off the threat.

After all, Huawei traces its roots to the Chinese Army—not exactly the fountain of technological ingenuity that its Israeli counterpart has proven to be. And despite being China’s largest telecom vendor, it was hard to envision a Western newcomer like Huawei creating, selling, installing and supporting complex, mission-critical systems around the world.

But things got serious in 2003, when Cisco sued Huawei for allegedly copying Cisco router technology—so closely that an index to the Huawei user’s manual was distinguishable from Cisco’s only because of “a slightly more frequent use of decorative stars on the paper,” according to a Forbes story at the time.

The lawsuit was settled, however, and Huawei has wasted no time: just yesterday British Telecom selected Huawei to supply routers and access equipment as part of an eight-member consortium handling a $19 billion upgrade of the UK’s phone network.

Marconi Corp, which had been a huge BT vendor, was shut out of the deal, and its stock fell 38% yesterday.

For Marconi, not to mention Cisco, Alcatel, Nortel and all the other “tels” out there, it only gets harder from here.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

“This may become a long war of attrition with eBay.”

That’s what Patrick Byrne—sorry, Doctor Patrick Byrne—wrote (in his letter accompanying Overstock.com’s wretched earnings report on Friday) about the failure to date of Overstock.com’s much-hyped (by Byrne himself) entry into the online auction market.

(Actually, it was a lack-of-earnings report: Overstock lost twice as much money as most analysts were expecting, and surprised the Street with a huge ramp-up in technology costs and a laundry list of “ mudpies,” a Byrnesian term for “money-losing things we did.” This for an operation that had supposedly been cutting-edge on the technology front, but, as Byrne now admits: “we’ve grown past the stage that we can do things with Excel spreadsheets and hand calculators.”)

Does this apparent absence of connection between the reality of Overstock’s failure to dent eBay’s auction machine and the boldness of Byrne’s “long war of attrition with eBay” proclamation remind anyone besides me of the Black Knight, in Monty Python and the Holy Grail?

Recall the dark forest setting in which the loud, brash Black Knight boldly confronts King Arthur, gets his left arm cut off (“I’ve had worse”), then his right arm (“Just a flesh wound”), then one leg (“Right, I’ll do you for that!”). Finally, when his remaining leg is cut off, the Black Knight declares: “All right, we’ll call it a draw.”

In much this very manner does Patrick Byrne, the Black Knight who only a few months ago metaphorically confronted Meg Whitman with his boast that Overstock’s auction business had launched “far faster than eBay’s first 15 or 20 days,” now describes his failure in yet another “skunkworks” project as: “a long war of attrition.”

If Byrne wasn’t the CEO of a public company, you’d think the same thing King Arthur thought as the armless, legless Black Knight screamed “Oh, oh, I see, running away then. You yellow bastard! Come back here and take what’s coming to you. I’ll bite your legs off!”

Which is to say, “You’re a loony.”

Among the many problems at Overstock, too numerous to mention in just one post, Byrne’s auction site has been as much a failure—by any objective measure—as any in the long list of Overstock’s let-downs. But don’t take my word for it. Here’s one of the “power sellers” who made the leap from eBay to Overstock, and clearly regrets it.

Sun Apr 24, 2005 5:29 pm: We really need the support right now. There are a few things I believe need addressed…

First, sub-categories. Many of us have been asking for these since September of last year. I was unhappy when we were told it would not be until the first quarter until they were finished. I knew it would be April, but still, nothing has been accomplished that we know of on this….We were asked for our opinions at least three times, with no results. Maybe you guys didn’t get the results you were looking for, because we have answered the question so many times….

To quote the Black Knight: “‘The Black Knight always triumphs! Have at you! Tis but a scratch…”

Jeff Matthews
I Am Not Making This Up

The driver was middle-aged, animated, friendly, and he spoke with enough of an accent that I asked where he was from originally.

“Greece,” he said, looking at me in the rear-view mirror.

“Ti kanis,” I said. (“How are you?”—about the full extent of the Greek I picked up in ten years of morning coffee at the Greek diner in Greenwich.)

“Kala,” he answered. (“Fine”) And we were off and running, talking about houses and kids and family. It just so happened he grew up in the mountainous region of Greece near Albania, where Debby, the waitress at the Greek diner, had also grown up and recently bought a house. (It looks amazingly like the mountains around San Jose, California…without the houses, smog and highways.)

We were having a great time. He was extremely talkative, almost too talkative—my daughter got out her iPod when he got involved in a very graphic description of the two colon operations he had undergone starting last fall. Way too much detail for her. But he and I had a good conversation almost all the way to JFK.

Almost all the way.

As we drove over the Whitestone Bridge, I pointed out the New York skyline to my daughter, who turned off her iPod to ask me about the buildings. I pointed out the spire of the Empire State Building and the Citicorp building with its trapezoid roof.

“Where were the Towers?” she asked.

I pointed to the hump of buildings rising from the lower end of Manhattan, and started to feel that hollowness that comes with all the sudden memories of 9/11. Being in the business I am in, I know a lot of stories about what happened that day, and they are not good stories.

Figuring the driver probably had his own 9/11 story, I asked where he’d been when the towers were hit. And that was when the conversation all changed.

“I was at doctor’s office,” he said. “It came on the news…” He shook his head. “You know, a lot of people in Europe don’t believe what happened…”

I felt a little twinge. “I know,” I said. “And they’re idiots.”

“Well…it was strange, you know?” He looked at me in the rear-view mirror.

“No. What was strange?” I was hoping he wasn’t going where he appeared to want to go. It could get very ugly very fast.

“Those planes, they take over how many planes? Six?”

“It was four.”

“Okay, four. And how do those planes go 500 miles and nobody does nothing about it?”

“Who did nothing?”

“The air control—they see plane leave flight path, and let them fly 500 miles?”

I was getting ripped, and also hoping my daughter wasn’t listening. The funny thing is, he didn’t seem to be arguing from a deep-seated ideological conviction, nor was he trying to provoke me. He just seemed oblivious. “They took over the planes, turned off the transponders, and nobody could see them. What’s the controller supposed to do? Say ‘Oh my God they’re flying it into the Trade Towers?’”

“Well, why they did nothing?”

“They thought it was being hijacked. Before 9/11, hijackers took planes to Cuba.”

This was news to him, as it probably was to most people under the age of 40. Oddly enough, an analyst-friend of mine was on a plane that was hijacked to Cuba in the 1970’s. He was flying from Chicago to a job interview in New York, and had called in sick from work—and the plane got hijacked and he ended up on an airstrip in Cuba.

Like all good analysts, my friend Todd took notes of the whole experience while it happened, on a legal pad. Fortunately the hijacking ended without violence, and Todd got home safely, although with a bit more fanfare than he’d hoped for when he snuck out of town for the day to interview in New York.

Unfortunately, Todd left the briefcase—and the yellow pad with the details of the whole hijacking, from start to finish—on the plane.

I didn’t tell the driver that story, because I had stopped talking to him. For one thing, I didn’t trust myself. For another, I had concluded he was a moron.

So I turned to the sports section and read about the Mets.

I am rooting for the Mets this year—after 40+ years of Yankee fandom—because I like Willie Randolph. I met Willie once, and found him to be the nicest, friendliest, most disarming sports hero I’ve ever met. Not that I’ve met too many, but he was great. Somehow we got into discussing his contract negotiations with Cincinnati, and he talked to me like he’d talk to his agent or to a reporter he’d known for ten years.

Also, I’m sick of the Yankee/Red Sox arms buildup, which is resulting in nothing but a bunch of highly paid old guys going at it. So I am rooting for Willie to turn it around in Queens. And I decided to focus on an article about Willie and his presence in the Mets dugout, rather than get into with a moron.

The driver persisted in talking—but not about 9/11. He switched to a different subject: a proposed bridge to be built between Alaska and Russia.

“That’s ridiculous,” I said without looking up. “Who’d use it?”

“Oh, I would,” he said. “What an experience!” He described how “they” had worked out technical difficulties, such as icebergs crashing into the base of the bridge (the piers would be circular, not square, so the icebergs would glance off the bases).

So, I thought to myself, you’re driving 50 miles across the most dangerous straights in the world, a thousand miles from civilization, winds howling and snow blowing and icebergs glancing off the base of the bridge. But, hey, you could drive to Siberia.

He talked about the idiotic bridge until we got to the Jet Blue terminal, and my daughter and I got out of that car as fast as we could.

Microsoft is stuck in a rut.

Don’t get me wrong: it is an extremely profitable rut. But it is a rut all the same.

Right now, for example, I am typing the draft of this blog on a Microsoft Word program that came with the Microsoft Operating System that came with my Sony notebook.

The only reason I use Word is that Microsoft has a monopoly on operating systems, and you can’t buy a regular old personal computer that doesn’t come with Microsoft software, which is too bad, because Microsoft software is terrible.

By that I don’t mean it doesn’t work, it’s just that because Microsoft has a monopoly and sells Microsoft Word to everyone who uses a computer, Word is crammed with every single thing everyone who uses a computer might need, like “Palatino Linotype” fonts.

Which makes Word less like something a really creative software company invented, and more like something the old Phone Company would have come up with.

For example, there are more than 30 little buttons in the “Tool Bar” at the top of this version of Word, each with a symbol so that writers can merely click a button to accomplish a task. “Tool Bars” are cool, helpful devices that took some of the mystery out of using word processing programs, and I am pretty sure Microsoft did not invent them.

Microsoft was not ever in the business of inventing cool, helpful things. Microsoft saw other companies come out with cool, helpful things—like spreadsheets and word processors and calculators and databases and the “graphical user interface” itself—and copied them like Chinese companies copy American technology without ever paying for it and sell it for an impossibly low price.

When you have a monopoly—whether it’s a country or a software developer—you can do that sort of thing.

In any event, some of the symbols on my Microsoft Word “Tool Bar” are easy to grasp, like the little icon of the floppy disk, which is clearly the “save” button.

Others are not so easy to grasp, such as the little greenish circle that looks sort of like the earth, only it has a chain beneath it. I am thinking this is the symbol of Microsoft owning the world monopoly on desktop computer software—millions of shlubs all around the world, chained to software that offers Palatino Linotype fonts and eighteen-zillion different ways to format text….but if you accidentally hit the ‘insert’ button you will type over things you’ve already written.

The most ridiculous part of the ‘insert’ button is that the only time I type over things I’ve already written is when I’ve accidentally hit the ‘insert’ button.

If Microsoft had the monopoly on car engines, I suspect there would be a dashboard button with some fancy symbol on it, which, if you pressed it by mistake, would instantly stop and restart your car engine, even if you were doing 80 miles an hour on Interstate 95.

And the only time you would ever know you had a function like that for your car is when you accidentally pressed the ‘restart engine’ button, right in the middle of Interstate 95.

But I digress.

After I finish writing this in Word, I will then copy it onto my Blogger Dashboard, which is Google’s blogging service. Google provides the blogging service for free.

Unlike Microsoft software, Google’s blogger is actually as simple to use as it says it is. And furthermore, unlike Microsoft software, when you have a problem with the Google blogger and you send an email to the Google Blogger Help Desk, somebody actually responds.

I had a problem with the Microsoft Network email last year. It was not the first time I ever had a problem with it, but it was an unusually bad problem: nobody was getting my emails. When the problem went away after a day or two, I emailed the unhelpful Microsoft Help Desk, and received an email saying they couldn’t help me two months later.

I am not making that up.

So here we have two companies whose products I use every day:

1. Microsoft, whose motto could be “$35 Billion In Cash But No Tech Support,” which makes overengineered NASA-type products, and charges monopoly pricing to people who have no other choice.

2. Google, which gives away searches, maps, blogging tools, satellite images…and offers tech support to boot.

Which is a better business?

Before you answer, consider this: Microsoft only gets paid once when somebody buys a computer. It’s a lot of money, and it’s at obscene profit margins—monopolies being what they are. But it’s still only once in the life of that computer.

Google, on the other hand, has a chance to get paid every second of every minute of every day by somebody somewhere using the Internet who clicks on an ad Google has placed on one of those searches or maps or satellite images or blogs you have used. It’s a tiny piece of change, not being monopolistically priced operating system software. But the pennies add up. (Last week’s earnings report showed just how quickly those pennies are adding up for Google.)

And I will bet money that right now every half-smart Microsoft employee is thinking “Who needs this Fixing-Longhorn-Bug-Number-19,852 nonsense when I could be creating something really cool—like Google Maps…for a company with a future instead of a past?”

And since Gates can never duplicate Google and roll out a copy at a lower cost to the user like he did all those tool bars and spread sheets and GUIs—because Google is free—he can’t stop it.

Because Google is the future.

And Microsoft is the past.

Jeff Matthews
I Am Not Making This Up

BearingPoint–the troubled consulting/integrating/services company–explains its weird, smells-like-a-consultant-came-up-with-this name, “BearingPoint,” as follows:

“The name BearingPoint means setting direction to achieve results.”

The problem is, BearingPoint hasn’t set much of a direction for itself.

Where do I get off saying this? Well, there are, the company web site brags, 16,000 “professional” BearingPoint employees running around the world, right now, straightening out other companies–integrating them, consultating with them, servicing them.

Meanwhile, the actual BearingPoint management team itself disclosed yesterday in an 8-K filing that:

“On April 19, 2005, our senior management determined that the financial statements …should not be relied upon because of errors in those financial statements…

“…If we were required to repay the 2004 Credit Facility before securing an alternative source of financing, we would have limited remaining cash resources and our ability to operate our business would be materially impaired. In such event, if we are unable to obtain an alternative source of financing, we may be forced to pursue alternative strategies as we will not have sufficient liquidity to operate our business in the ordinary course and remain a going concern…”

In short, BearingPoint is a consulting company that can’t manage itself. And it may not remain around as a “going concern.”

But it does, however, have a cool name.

Meanwhile, many great companies are out there, creating value for shareholders and employees and retirees and consumers–P&G, Wal-Mart, Nike, to name a few–without feeling the need to explain exactly what their name means, and without internal control deficiencies or going-concern problems.

But then again, those companies aren’t consultants to other companies. Imagine how the world might look if BearingPoint itself actually had good management!

Somewhere down the road to corporate integrity, I’d like to see BearingPoint change the description of its name to something more honest:

“The name BearingPoint means we paid millions of dollars to a bunch of name-consultants and that’s what they came up with.”

I wish I really was making this up.

Jeff Matthews
I Am Not Making This Up

The major media chains, and the minor ones, too, all seem to have one thing in common: business stinks.

Said the New York Times:

“Our large-market newspapers, The Times and The Globe, were flat or down in advertising revenues in the quarter, as categories such as telecommunications and banking were adversely affected by industry consolidation. Our largest properties were also affected by the timing of Easter…”

Said the Dow Jones Company’s Peter Kann, a gloriously incapable executive who has, nonetheless, retained his position as chief architect of that franchise’s erosion:

“We continue to battle a persistently difficult B2B (business-to-business) print advertising climate particularly in the technology category…. However, heading into the second quarter, we are cautiously optimistic that advertising trends will improve.”

Said the Tribune, where advertising revenues were up a non-whopping 2%:

“Newspaper advertising revenue growth was solid in January and February, although March was negatively impacted by the timing of the Easter holiday. In television, our results reflected overall industry softness and the impact of Local People Meters in our major markets.”

No apologies from Yahoo, however, where advertising revenue rose 54%. And the total dollars involved–a billion worth–are not trivial any more. Online is firmly where it’s at.

And you would think the media chains would clearly understand that, because every one of them noted strong growth in their online sites–30% at the New York Times alone. But they somehow fail to make the inverse connection to the decline in their core business.

Instead, they blame it on Easter–which apparently came out of the blue and without warning on March 27th. And, of course, the dreaded and terribly disrupting Local People Meters.

It’s always something.

Jeff Matthews
I Am Not Making This Up

Another one bites the dust.

Now that AIG has been unmasked as a fake-the-numbers blue chip, Coca-Cola comes along and settles SEC charges that “Coke repeatedly inflated sales and misled investors by shipping $1.2 billion of extra beverage concentrate to bottlers in Japan, one of its largest and most-profitable markets, during the three-year period” of 1997 to 1999, according to today’s Wall Street Journal story on the matter.

Seems that Coke “stuffed the channel”–a term more common in the high-tech industry, where the HPs and Compaqs and IBMs of the world do their best in the last few days of a nail-biting quarter to ship product out the door in order to book it as “revenue,” and thus “make the number.”

Channel-stuffing is far more common than anyone on Wall Street would like to think: a friend of mine who came out of the venture capital world found it very hard to invest in any tech company at all. “I know what these guys go through the night the quarter ends to hit the numbers,” he told me. “You don’t wanna know.”

Sort of the business world’s version of not peeking into the kitchen of a restaurant if you want to enjoy the food.

In any event, Coke apparently has come clean to a fairly straightforward scam: offering end-of-quarter deals to bottlers in Japan such that the bottlers’ inventories jumped 60% over a three year period in which actual sales of Coke only rose 11%.

That’s quite a stuff-job.

Quothe the Journal:

“The scheme enabled Coke to meet Wall Street profit targets in eight of the 12 quarters, the SEC said. While the sales technically were legitimate, Coke failed to disclose their existence or financial impact, concealing its full sales and profit condition.”

The elephant in the room, of course, is the Oracle of Omaha, Warren Buffett. Buffett, who loudly and publicly demands integrity first and foremost among his co-workers and the companies in which he invests, sat on the Coke board during the entire three-year period in which the company’s executives were feverishly stuffing the daylights out of the Japanese channel.And this was, apparently, not some rogue manager in Japan: “the SEC said Coke executives in Atlanta participated in the scheme.”Does Warren Buffett not know how to read a balance sheet? Did he not wonder how Coke was growing unit sales 60% in an 11% market?Perhaps Buffett is more easily snowed than anyone would believe: he also served on the board of Gillette, the razor maker which P&G recently agreed to buy, during its channel-stuffing days a few years ago. As for his recent involvement in the blossoming AIG scandal, Buffett, no doubt, is on the side of righteousness and goodness…but, still, his baby, Geico, was on the other side of the table dealing with a man who appears to be going down hard.One wonders–after Coke, Gillette, and AIG–if the same brush of scandal that has tarnished all three former infallibles will ever reach the feet of the Oracle of Omaha.Jeff MatthewsI Am Not Making This Up

One nice waspy-looking couple says to the other, “We sold our two-bedroom in the Village at a great price and bought the Virgin Islands.”

Thus, in the April 18 issue, The New Yorker adds to its inventory of market-topping cartoons that have appeared, with uncanny regularity, at extremes since the magazine’s founding in 1925. This one surely marking some sort of peak in the real estate bubble.

It struck me especially after recently looking through the huge book of New Yorker cartoons with our younger daughter. She didn’t grasp many of them, especially those related to the stock market, topical economic events and of-the-moment business celebrities.

An early-90’s Roz Chast “Martha Stewart Takes Over The Universe” panel is especially out-of-place now, while the Internet bubble is best summed up in the year 2000 cartoon showing two airline pilots at the controls of a large jet, one exclaiming, “This is so cool! I’m flying this thing completely on my Palm pilot!”

(My favorite, less frozen-in-time internet era cartoon is the bum on a plane sitting in First Class next to a very well dressed businessman, saying, “I got my ticket for three dollars over the Internet. Are you going to eat that salmon?”)

Other eras are all marked with their own, dated cartoons. From the mid-70’s energy crisis to the 1929 crash.

In 1981, with the stock market still adjusting to Volcker’s inflation-busting Fed policy, and a year away from beginning the great 1982-2000 bull market, the New Yorker summed up things this way:

“On Wall Street today, news of lower interst rates sent the stock market up, but then the expectation that these rates would be inflationary sent the market down, until the realization that lower rates might stimulate the sluggish economy pushed the market up, before it ultimately went down on fears that an overheated economy would lead to a reimposition of higher interest rates.”

Sounds familiar.

Jeff Matthews
I Am Not Making This Up

Driving from West Palm Beach airport to my mother’s home in Stuart, Florida is about an hour’s drive, all in. Normally, the time goes by quickly because the rental car is a Hertz, and, since Ford owns Hertz, the car has satellite radio.

Today the car was a Kia, and it did not have satellite radio. So our daughters and I wrestled with old-style, terrestrial radio, and hated every minute of it.

Contrary to the assertions of the old-style radio CEO I met with at a conference earlier this week (described in “Much Ado About Nothing?”), old-style radio has limited choice, lousy audio quality, and way way too many commercials.

We re-discovered the sad state of affairs of Generic Mainstream Corporate Radio Mediocrity after trying unsuccessfully to locate a station that was actually playing “music” as opposed to commercials or station jingles. Finally, I hit the “scan” button and let the stupid radio simply run through the entire FM band, one station at a time.

At the lower end were a couple of gospel stations, then a mix of Hispanic, Classic Rock, Hip-Hop, Oldies and “Z-100” stations (about 13 in all). And the few that were accidentally playing “music” at the time the scanner sampled them, were all playing the same “music” their equivalent formats play up North. Generic Mainstream Corporate Radio Mediocrity struck again.

One of our daughters slipped on her iPod.

Finally, however, after about thirty minutes, I struck gold: the scanner picked up a station playing “music”–in this case, “Light My Fire.” And it was the extended “Light My Fire.” Bliss.

Bliss, until we drove out of the range of that station and “Light My Fire” faded into “I Just Called To Say I Love You,” followed by extended commercials, disk-jockey chatter about the weather (there is not much variation in the weather in Florida), and extended commercials.

Did I mention the commercials?

The entire trip was a sixty-minute advertisement for satellite radio.

I have, in the past, had a hard time justifying the valuations of the two satellite radio choices–Sirius and XM. I am now convinced that, over the very long run, those valuations may prove reasonable; probably for XM rather than Sirius, which has a handicapped business model owning to its inferior technology and low OEM market share with the auto makers.

Nevertheless, at this stage, I have an open mind. Informed opinions are welcome.

Jeff Matthews
I Am Not Making This Up